Part 1 of ‘four points of attention when concluding (commercial) agreements’: term and termination

You are negotiating an agreement with your counterparty - for example, a supplier, manufacturer or service provider. Are you agreeing something for a definite or indefinite term? Are you thinking about termination options? And what if you do not agree on termination or duration? In this blog we explain in a practical way what the (im)possibilities are.

Definite or indefinite term?

One can enter into an agreement for a definite period – e.g. fortwo years or for the duration of a project – or for an indefinite period. Both have advantages and disadvantages. The advantage of an agreement for indefinite term is that the parties enter into it with the intention of working together for a longer period of time. This offers (apart from possible termination options) certain security and, for example, the possibility - in view of the cooperation - to make certain (expensive) investments that can be earned back. The disadvantage can be that when the parties do not yet know each other well, the parties (subject to termination options) are "locked in." The opposite is obviously true for a fixed-term agreement: the advantage of a definite term agreement is that there is a clear end point of the cooperation, the disadvantage is that the intention to cooperate is also temporary (and therefore, for example, it is also less attractive to invest).

Termination options

In short, it is recommended to clearly agree in all agreements – both for an indefinite and definite term – how the parties can "get rid of each other." Clarity in advance prevents potential long (and expensive) discussions afterwards.

At first it might be thought that it is not necessary to agree on a termination option in a definite term agreement: after all, the agreement ends automatically after the agreed term. Nevertheless, under circumstances it may be recommended to agree upon a termination option. This is because a definite term agreement can also be agreed upon for a longer term ( e.g., ten or twenty years). If the agreement is properly executed, but one of the parties still wishes to terminate the cooperation (example.g., because the contract is less lucrative than expected due to rising prices) and no termination option has been agreed upon, in principle, the entire term of the agreement must be served. Consider in advance whether this is desirable.

When drafting a termination clause, think about special situations in which the parties can, for example, bid each other farewell immediately - example.g., in the event of a change of control, a (petition for) bankruptcy or suspension of payments etc. - and other situations in which a party wants to terminate the agreement "for convenience" for example, because another party could offer the service cheaper. Always consider also what length of notice should be observed. In addition, it is recommended to agree on the consequences of termination. For example, what about orders that still need to be delivered after termination? And should certain materials or samples be returned in the event of termination? Should certain confidential documents be destroyed?

What if you have not agreed on termination?

The potential consequences if one has not agreed upon termination differ.

In the case of an indefinite term agreement without a termination option, the Duch Supreme Court has ruled that these agreements can, in principle, be terminated. In this case, however, reasonableness and fairness may imply that termination is only possible if:

• there are sufficiently serious grounds for termination; and/or
• a reasonable notice period is used in the event of termination; and/or
• compensation or damages are due.

If the parties have entered into a definite term agreement and have not agreed anything about termination, the parties cannot, in principle, terminate the agreement, as explained above. The term of the agreement must be completed in that case, unless there are unforeseen circumstances.

This blog is part of a blog series on points of attention when entering into agreements. Don't want to miss a blog? Or would you like to know more now about an agreement you are planning to conclude? Please reach out to s.poutsma@ploum.nl or b.schoenmaker@ploum.nl.

Also appeared in this blog series:
1. Liability
2. Force majeure
3. Choice of law and choice of forum